by Jim Pride, DDS, and Amy Morgan
Once your systems are in order, patient care is excellent, and staff are performing at new high levels, the next challenge that an advanced dental office will inevitably face is how to plan for and execute a seamless practice transition. Transitioning your practice is a major, life-changing event that you need to approach with great forethought. Three key issues within an advanced practice will mandate the right transition strategy:
(1)The "busyness" issue. This is when too much of a good thing "ain't good." Several factors create too much busyness in the practice. One is that the increased demand for dentistry from the baby boomers, now in their 40s and 50s, is peaking. Another factor is that more dentists are retiring than graduating. Patients need more dentistry but there are fewer dentists to provide it.
(2)The balance-of-life issue. Many advanced dentists who have attained or are approaching financial freedom may be ready to reduce their hours, retire and enjoy other pursuits, or specialize in a particular type of dentistry.
(3) The catch-up-on-savings issue. Some advanced dentists need to increase their practice value and/or cash flow to achieve financial freedom. Many practitioners wait until their 40s, 50s, and even 60s to focus on cash flow and savings. A significant jump in production and profitability may be required to "catch up" on savings for retirement and lifestyle demands.
Senior dentist Dr. Terry Lynn Tennant and her new solo-group partner, Dr. Renee Watts
If any of these issues apply to you, transitioning the practice may help you reach your goals. There are many ways to approach your transition. You could:
• Retain an associate who may or may not buy-in to the practice.
• Contract with an associate who will buy-in at a specified time and price.
• Sell a portion of the practice and work in a partnership.
• Sell a portion of the practice and work in a "solo-group," where two independent dentists with separate practices and staffs share space.
• Sell the total practice and continue to work as an associate.
• Sell the practice and exit, either immediately or after a brief "lingering" period.
Which approach should you choose? Let us introduce a dentist who recently transitioned her practice successfully. Dr. Terry Lynn Tennant of Delta Oaks Dental Care in Eugene, Oregon, has been studying at the Pride Institute for 10 years. Because of her focus on management, leadership, and clinical skills, she developed an advanced practice at an early age. At the time she transitioned her practice, her production per hour was $530, with a patient base of 2,500; eight staff members; and eight treatment rooms. In her case, "busyness" and "balance-of-life" issues were key. She was working four days per week, and while she had not yet achieved full financial freedom, she had begun saving early for retirement and could reduce her hours significantly. Working less but continuing her lifestyle was a very important goal for Dr. Tennant. To make this goal a reality, Dr. Tennant and her Pride transition specialist, Sue Larsen, created cash-flow projections that showed the most financially viable solution was for another dentist to join the practice.
The associate buy-in scenario
For many dentists, taking on an associate is a great way to transition their practices. Dr. Tennant wanted to reduce her hours, take equity out of her practice, have her practice serve more patients than she could handle herself, enjoy the camaraderie of a colleague, and eventually sell to another dentist when ready to retire. Therefore, she chose to take on an associate.
We coached Dr. Tennant on how to offer an associateship that would serve the long-term interests of both dentists — a "win-win" solution. Rather than an associateship being just a short-term job, Dr. Tennant was trained to make it an opportunity and trial period for a future buy-in. To avoid a revolving door of young dentists who have only a fleeting interest in your practice, an associate must be confident of a secure future. Dr. Tennant was committed to offering a bright future to the right candidate, namely, the opportunity to develop a strong skill set and create a viable practice that he or she would eventually buy.
Finding the right person
The first step was for Dr. Tennant to find the right person. "I was looking for someone with wonderful technical skills and people skills," she explains. "An extroverted personality was very important. I wanted someone who also was a good fit with my practice philosophy. And I needed our personalities to be compatible." (See her Web site, www.deltaoaksdentalcare.com under "Meet the Doctor" for a statement of her vision, goals, and philosophy.)
Pride Institute recommended a series of interviews to get to know as many candidates as possible. However, sometimes asking others for a referral is the best route to finding an associate. In Dr. Tennant's case, another dentist who knew her office and philosophy of care recommended the associate who later bought in to her practice: Dr. Renee Watts. This dentist met Dr. Tennant's criteria of clinical excellence, people skills, matching practice philosophies, and compatible personalities. Dr. Tennant's practice met Dr. Watts's needs, as well. "The systems were in place," she says. "There was low staff turnover and the team was terrific, so that was a big draw. The office was beautiful, and the patients were well taken care of. And I wanted to practice with another dentist who would be staying on. So, I felt very comfortable from the beginning."
Because Dr. Watts had to complete a contractual obligation at another facility, she and Dr. Tennant decided to have her work in the practice just one day per week initially. This allowed the two of them to get to know each other and further assess their compatibility. By the time Dr. Watts was ready to come on full-time and the two dentists were ready to make a formal agreement, they were very comfortable working together.
"It's been terrific," says Dr. Watts. "There were the logistics of managing all the personalities of our crew, but we got along pretty well. My agreement with Dr. Tennant spelled out everything, so we had no major problems at all." Dr. Tennant adds that finding the right associate wasn't easy. "It took me a while to find Dr. Watts. I knew the person I wanted, but I sometimes felt I should settle for someone less than ideal. Now I'm glad I stuck to my guns and didn't compromise, because Dr. Watts has worked out perfectly."
Negotiating a workable, formal arrangement
After the two doctors decided they could practice compatibly and productively together, it was time to create a formal arrangement that would support their long-term goals. The arrangement gave Dr. Watts specific goals to achieve in working toward a buy-in so that she could begin thinking like an owner from the first day. She worked as an associate to build a practice within a practice, then she bought that developing practice. Dr. Tennant still retained her practice, which she plans to sell in the future.
We can't emphasize too strongly the importance of specifying everything up front via a formal agreement. The entire arrangement was negotiated and molded to suit the particular doctors' needs and was then reviewed by their lawyers and contractually agreed upon in writing before Dr. Watts began working as a full-time associate. When everything is decided and accepted in advance, there are no uncertainties upon moving forward.
"Every detail that could possibly come up was covered in the agreement," says Dr. Tennant. "We've had no major misunderstandings in the two years since we entered our agreement, basically because of our compatibility and the thoroughness of the agreement." Dr. Watts adds, "The agreement was extremely fair to both parties. It protected us both."
The first part of the agreement centers upon making the associateship period work well. Details, such as the duration of the associateship, compensation, duties, and production goals the associate must achieve to afford the buy-in, were included. In Dr. Watts's case, the associateship was projected to last for two years, at which time she was expected to reach the buy-in point — production of $35,000 per month consistently for six months prior. "We calculated that this would be an appropriate amount of time for Dr. Watts to grow in confidence and credibility and comfortably produce at a level that would afford the buy-in," says transition specialist Sue Larsen. "At this point, Dr. Watts would be able to service the debt and make more money as an owner than she was making as an associate."
Because she had goals and the drive and initiative to meet them, Dr. Watts reached the buy-in point after only one year, and purchased her growing practice then. "I was very surprised and thrilled to reach my goals so fast," she explains.
Dr. Watts grew her patient base by: a) Acquiring some designated patients from Dr. Tennant's large base; and b) Obtaining patients on her own through marketing. The agreement gave her a financial incentive to build her own patient base, and the good will she generated was purchased at a discounted rate. "We create this incentive," says Sue Larsen, "to encourage the associate to show initiative and learn how to ask for referrals and to market for new patients."
During the associateship, Dr. Tennant modeled essential leadership and management skills for Dr. Watts. Mentoring is very important to both dentists. Dr. Watts got to see how Dr. Tennant used a practice vision, an annual plan, numbers-tracking systems, leadership, staff meetings, huddles, continuing education, and other tools to mold an excellent advanced practice. This primed Dr. Watts to assume a leadership role at the buy-in point.
The second aspect of the formal agreement gives the details of the buy-in. These details went into effect at the outset of Dr. Watts's full-time associateship, giving her clear goals to work for in a definite time frame. This part projects the amount the associate will pay to the senior dentist to become a principal, how that amount is determined, the financing arrangement, and a cash-flow analysis of how the associate will afford the buy-in. At the actual point of the buy-in, Sue Larsen appraised the practice and calculated the exact numbers.
Drs. Tennant and Watts formed two independent practices with separate staffs. They shared the same space (and one bookkeeper). Their arrangement — a solo-group practice — is one we highly recommend because it preserves the independence of each doctor while offering the benefits of sharing space and expenses. The solo-group works very well for dentists like Dr. Tennant who have busyness issues and/or who choose to cut down on their hours but still practice. And by guiding Dr. Watts to build a practice within a practice rather than purchase the senior doctor's practice outright, Dr. Tennant gets equity out of the developing practice while still retaining a practice that she can sell later.
The buy-in agreement also specified how the solo-group would operate, including phone numbers, expense-sharing, and the business structure once the two dentists became equal partners, as well as provisions for how further transitions would be handled should they arise. "We knew which expenses we would split 50/50 and which we would pay based on our individual production over a three-month period," says Dr. Tennant. "The arrangement worked this out in detail in order to be fair to both parties."
Introducing the new dentist
Dr. Tennant's staff was aware of her plan to find an associate and future partner from the beginning. "They wanted to support the new dentist because they knew that would support me," explains Dr. Tennant. We recommend that you level with the staff when you are planning a transition. Chances are they will get wind of your intentions via their sixth-sense antennae anyway, so keeping a secret from them can only create uncertainty and worry about their futures. "Almost from the beginning," recounts Dr. Tennant, "staff members seemed to gravitate to either Dr. Watts or to me. When it came time to divide them up at the buy-in, each person already had a preference, so it worked out really well."
It is vital to introduce the new dentist. A letter - preferably one from the senior and another from the new dentist - will help to make the associate well known and well thought of in the community. Dr. Tennant sent such a letter when Dr. Watts became a full-time associate.
Her transition specialist urged Dr. Tennant to do a timeline, which is a projection of where she would like to be in one, five, and 10 years. We recommend this exercise to all dentists contemplating a major change in the practice to ensure that the change supports one's long-term goals. Doing a timeline rekindled Dr. Tennant's long-standing interest in psychology. After Dr. Watts joined the practice, Dr. Tennant was able to take time off to pursue a master's degree in this subject. "I'm loving school so much, I may go on to get my PhD," says Dr. Tennant, who is now planning a dual career as a dentist and therapist. Why not? We can be anything we want to be. Your timeline will help you to uncover any latent dreams that you may have for your life, or maybe you'll find that you're happy just practicing dentistry. Whatever you decide, a carefully planned and well-crafted transition strategy will help you achieve your dreams.
In our next article, we'll discuss another transition option — selling the practice and exiting. We'll describe how to value an advanced practice, finance the sale, and structure the transaction for the best tax advantage to both doctors. We'll show how to leave a practice that you can be proud of and that is easily assumable by the new doctor.
To learn more about this topic, attend Pride Institute's popular seminar — now in its 15th year and completely revised to meet current tax laws, legal standards, and market conditions — Transition Strategies: Associates, Partners & Appraisals. Meet Pride's transition specialists, who have helped hundreds of dentists make wise decisions about their futures, get their practices transition-ready, and execute harmonious, win-win conversions. For more information on cities and dates, call Pride Institute at (800) 925-2600